Is Microsoft the Next Apple?

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With shares of Microsoft Corporation (NASDAQ:MSFT) trading at around $28.15, is MSFT an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

At one time, Microsoft was the ultimate Wall Street darling. However, Apple Inc. (NASDAQ:APPL) took over that role several years later. Now, there is confusion as to which of these companies is better positioned for the future. At the risk of negating suspense, the truth is that they’re both well positioned for the future. However, this doesn’t necessarily mean that both companies are hitting on all cylinders.

Microsoft has a lot of potential thanks to retail stores, Windows Blue, streaming video, cloud computing, and more. Going forward, Microsoft wants to become a cloud, devices, and services company. We’ll see how that turns out. Though Microsoft has been a steady company through the years, it’s painfully evident that many of its products consistently fall short to competitor products. Can this change? Yes. Will it change? Maybe.

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Microsoft plans on turning the Xbox into the ultimate entertainment machine. It will offer streaming video with premium content and voice control. It will also offer exclusive content, which has been a big selling point for other services. Of course, this means Microsoft will be competing with Netflix (NASDAQ:NFLX) and Amazon.com Inc. (NASDAQ:AMZN). If the Xbox does turn into the ultimate entertainment machine, then it will be a nice complement to Xbox Music.

Redbox Instant by Verizon Communications Inc. (NYSE:VZ) will be available on Xbox 360 via an app. Redbox Instant costs $8 per month for four DVD rentals and approximately 4600 movies. How does this benefit Microsoft? After a trial offer, an Xbox Live Gold subscription will be required, which costs an additional $5 per month. Reviews for Redbox Instant have been mixed at best thus far.

Microsoft’s biggest competitors at the moment are Apple and Google Inc. (NASDAQ:GOOG). The chart below compares fundamentals for Microsoft, Apple, and Google.

MSFT

AAPL

GOOG

Trailing   P/E

15.43

10.26

25.12

Operating   Margin

35.43%

33.46%

26.68%

ROE

22.62%

38.41%

16.61%

Dividend   Yield

3.30%

2.40%

None

Operating   Cash Flow

$30.54 Billion

$56.73 Billion

$16.62 Billion

Short   Position

1.30%

2.10%

1.70%

Beta

1.14

0.74

1.18

 

Let’s take a look at some more important numbers…

E = Equity to Debt Ratio Is Strong   

The debt-to-equity ratio for Microsoft is strong, which has always been the case.

Debt-To-Equity

Cash

Long-Term Debt

MSFT

0.20

$68.10 Billion

$14.22 Billion

AAPL

0.00

$39.82 Billion

$0

GOOG

0.10

$48.09 Billion

$7.21 Billion

 

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T = Technicals on the Stock Chart Are Strong

To see marginal performance from Microsoft shouldn’t be a surprise. Many investors own Microsoft for safety while collecting healthy dividend payments.

1 Month

Year-To-Date

1 Year

3 Year

MSFT

0.48%

6.38%

-9.86%

2.99%

AAPL

-1.25%

-14.15%

-23.32%

107.40%

GOOG

0.63%

14.78%

28.06%

44.98%

 

At $28.15, Microsoft is trading above its 50-day SMA and 100-day SMA, but below its 200-day SMA.

50-Day   SMA

27.60

100-Day   SMA

27.56

200-Day   SMA

28.79

 

E = Earnings Have Been Steady                 

Earnings had been improving for several years until 2012. Top-line growth has been consistent on an annual basis.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

60.42

58.44

62.48

69.94

73.72

Diluted   EPS ($)

1.87

1.62

2.10

2.69

2.00

 

When we look at the last quarter on a year-over-year basis, we see an increase in revenue and a decline in earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

20.88

17.41

18.06

16.01

21.46

Diluted   EPS ($)

0.78

0.60

-0.06

0.53

0.76

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Support the Industry

The PC business might be in decline, but strength in mobile should make up for that decline without much of a problem. Microsoft has yet to make a meaningful impact in this area, but it would be naive to think that strategic plans aren’t being formed on a daily basis. Remember that Microsoft wants to become a cloud, devices, and services company. Also, cloud computing is extremely hot at the moment, and Microsoft is interested in jumping in with both feet.

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Conclusion

Microsoft has consistent top-line growth, strong margins, excellent cash flow, a healthy balance sheet, and an impressive yield. It’s not the next Apple, nor is it the next Microsoft of the 1990s. However, it’s poised for continued success.

Microsoft is an OUTPERFORM.

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